💲 Financial ratios cheat sheet and top 10 dairy products

Weekly Edition #15

Good Morning. Welcome to the Gravel Road - your weekly agri-news infotainment. We’re like that first warm, spring day. A little muddy, a little sloppy, but full of hope for the upcoming days…

Here’s what we have this week:

• 💲 Financial Cheat Sheet

• 🚿 Chemical Costs

• 📃 Form An LLC

• 🥛 Top Ten Dairy Products

WISDOM

If I told you as a farmer or rancher that you’re a small business owner, would you nod your head in agreement or wrinkle your face and say, “huh?” Often times, our perception of small businesses is the local mechanic, HVAC, boutique, or online Etsy store.

But, as an ag operator, you are also a small business owner. For example, if you’re a corn farmer and have less than $2.5 million in average revenue, the U.S. Small Business Administration (SBA) qualifies you as a “small business.” In comparison, if you’re a dairy farmer, your revenue threshold is $3.75 million to be a small business.

You can check out your operation’s category on pages 2 & 3 of this SBA Table of Size Standards.

Interesting enough, but what does this mean to you, the small business owner?

Well, it means we ought to treat our farm and ranch finances as every healthy small business should. By paying attention to them. One of the ways to accomplish this is by tracking and monitoring farm financial ratios.

We track a lot of data in the ag industry, but often we don’t know what financial Key Performance Indicator (KPI) or ratio targets are healthy. Don’t fear - today’s your lucky day. With resources from Michigan State University, I put together this “Farm Financial Ratios Cheat Sheet.”

Here’s 18 Farm Ratio Targets for a healthy ag operation:

• Current Ratio – Above 1.5

• EBITDA – Higher the better

• Debt to Equity Ratio – Below 1

• Net Income Ratio – Above 20%

• Debt to Asset Ratio – Below 30%

• Asset Turnover Rate – Above 45%

• Interest Expense Ratio – Below 5%

• Equity to Asset Ratio – Above 70%

• Net Farm Income – Higher the better

• Operating Profit Margin – Above 25%

• Rate of Return on Equity – Above 10%

• Rate of Return on Assets – Above 10%

• Operating Expense Ratio – Below 60%

• Depreciation Expense Ratio – Below 5%

• Debt Service Coverage Ratio – Above 1.5

• Capital Debt Repayment Coverage – Above 1.5

• Replacement Margin Coverage Ratio – Above 1

• Working Capital to Gross Revenues – Above 25%

Use these benchmarks to guage and monitor your agri-business financial health.

A downloadable version of this cheat sheet, a guide to what each ratio means, and how to calculate each KPI will be available soon…

SEEDS

• ⚖️ WOTUS: Congress passed a resolution disapproving of the recent Waters of the United States (WOTUS) rule that will be sent to President Biden’s desk where there’s a potential veto expected.

• 🌾 Stalk Flour: A food based startup, The Supplant Company, launched a wheat flour blend utilizing the stalk of the wheat plant with claims of higher fiber content and fewer calories.

• 🚿 Chemical Costs: Farmers Business Network (FBN) released their Ag Chemical Price Transparency Report which analyzed over 3,000 data points on more than 300 farms in 37 states. The takeaway? “Farmers are paying very different prices for identical products, because by and large, crop protection sellers are not providing transparent pricing and many regions lack competition.” -Charles Baron, FBN Co-Founder

• 🚁 Hydro-drones: Next generation drones, used for crop scouting & product application, may ditch the batteries and use hydrogen fuel. Heven Drones’ new model can fly for 100 minutes with a 15 pound cargo capacity.

• 📈 Rate Hike Consequences: Recent interest rate hikes increase the cost of borrowing money, but they also impact other aspects of agri-business. One such area is the increase in cost to store your crop. This article breaks down how to factor these increases in to your storage costs.

How To: Form an LLC

Before we begin, let’s look at what an LLC is. A limited liability company (LLC) is a type of business structure that offers the owners (known as members) liability protection for the company’s debts and legal issues.

So, this means if the LLC incurs debt or legal troubles, your personal assets are typically protected. This is different from a sole proprietorship or general partnership, where owners are personally liable (on the hook).

Now, here’s the steps to form one:

First, choose your business name. Search your state's entity registry to make sure it's not already taken.

Next, file articles of organization with the state and pay a fee. Most states make this easy to do on the Secretary of State's website and charge ~$150.

Then, draft and adopt an Operating Agreement. It's not mandatory, but recommended to spell out the rights, powers, duties, and obligations of the members of the LLC.

Finally, obtain an employer identification number (EIN). This is a federal "social security number" of your business and easily done online.

Congratulations! You’ve now formed your LLC. Just make sure to research and follow the rules of your state.

DISCLAIMER: Nothing in this newsletter is legal advice. Nor should it be relied on as legal advice. Always consult with an attorney in your jurisdiction for legal matters.

THIS WEEK’S TOP TEN: Dairy Products

Some of the most beloved, nutritious foods in the world are made as a result of the humble Holstein (and other dairy cows). I mean, if you put a slice of cheese on top of my head, my tongue would beat my brains out trying to get to it.

And, I’m sorry almond & oat farmers, but I just can’t understand how you “milk” plant products, so we’re going to look at the biggest volume dairy products this week.

Here’s the top ten dairy products based on global production volume:

1. Milk - 931,000 tons

2. Cheese - 24,000 tons

3. Skimmed milk powder - 4,000 tons

4. Whole milk powder - 3,200 tons

5. Butter - 2,300 tons

6. Cream - 1,600 tons

7. Other fresh dairy products - 1,200 tons

8. Condensed milk - 550 tons

9. Whey protein concentrate - 440 tons

10. Lactose - 330 tons

MEME OF THE WEEK

That's a wrap, folks.

THANK YOU to everyone who works off the beaten path to feed our nation.

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